DUFRY - Dufry: Positive Momentum

Summary

• The company just refinanced its revolving credit facility.
• There is positive news on October sales data.
• Our six key takeaways are still valid, and so is our valuation.

After a few months and since our last publication (released at the end of September), Dufry ( DUFRY ) is up by almost 40% compared to the S&P 500 return at 7.23%. We had to be patient with our investment idea, but we knew that it was a good call. Aside from the positive Q1 and Q2 results, our buy case recap was based on:

1. A merger combination with Autogrill with a confirmation of our preliminary synergies estimate of $80-$100 million at the EBITDA level. In detail, we were assuming 70/90 basis points on the 2019 cost base;
2. Inorganic acquisition during the pandemic outbreaks such as the Hudson transaction which added almost 1k new stores at major tourist hub destinations and airports;
3. COVID-19 was a key negative catalyst with travel restrictions, excess regulation on tourist destinations, and a global health crisis that led Dufry to tackle its P&L accounts to reduce losses and achieved permanent cost savings. Here at the Lab, we still believe that these measures are not priced in by Wall Street analysts. With a reverse DCF, we estimated that on average consensus is pricing a 2019 revenue recovery in 2025 (we are a year in advance with our forecasted numbers) and we are also more bullish on the operating cash flow margin which we set at 13%;
4. Important to reports are Alibaba and Hainan partnerships. Travel retail opportunities in China are growing at a double-digit pace and with the JV dedicated and memorandum of understanding, Dufry aims to improve its capabilities in the digital space;
5. Our take on Dufry's capital market day called the ' Destination 2027 ' Strategic Plan. Here the company emphasized: new customers' travel experience, a more diversified geographical presence in fast-growing markets, more operational improvements with productivity gain and higher FCF generation, and more ESG investments.

With the latest company news, we see support in our investment thesis. Starting with the regulators, three days ago, the European Commission approved , under the EU merger regulation, Autogrill's acquisition by the Swiss Dufry. The EU Antitrust concluded that the proposed acquisition would not raise competition concerns, given its limited impact on the market.

On the financial side, Dufry reported its Q3 numbers and despite the macroeconomic slowdown (EU is a key market for the company), at the nine months aggregate level, the company reported almost 100% in organic growth with an EBITDA that reached CHF 463.7 million with a margin of 9.2%. This fully supports our key takeaway #3. Important to emphasize was the positive momentum reported by management in the Q&A call, October top-line sales are up by almost 35% on a yearly basis. In Q3, debt obligations were further reduced and Dufry is well ahead of its plan. Debt stood at CHF 2.7 billion and was at its lowest level since March 2015. Still on the liabilities side and despite the rising inflation rate, the company successfully refinanced its main credit facilities at favorable interest rates. In terms of new business, the company won a tender offer in Western China and secured an additional 15-year contract with a JV to operate at Bangalore Airport .

Conclusion and Valuation

At the core business, Dufry is gaining momentum, and we do believe that this company is set to positively outperform our travel recovery bet. This is why we confirm our valuation at CHF 50 per share, and the latest positive news fully supports our thesis. Here at the Lab, we also suggest having a look at Expedia Q2 2019 Vs. Q2 2022 - Something Doesn't Add Up .

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